What is the Carbon Reduction Commitment?

The Carbon Reduction Commitment (CRC) is a new mandatory emissions trading scheme aimed at securing reductions in carbon dioxide emissions from large, non energy-intensive, public and private sector organisations, including businesses, groups of companies, local authorities, universities and NHS bodies.

The CRC is the first major policy initiative to flow from the Climate Change Act 2008, which included the commitment from Government to reduce UK greenhouse gas emissions by at least 80 per cent (compared with 1990 levels) by 2050.

Although commencement is some way off – the first CRC scheme year is expected to be the 2010/2011 financial year - organisations likely to be affected should be preparing now.

Who is affected?

Organisations will have to participate as “qualifying undertakings” if they consumed 6000 megawatt hours or more of electricity during 2008 supplied via a half-hourly electricity meter. (This is equivalent to an annual electricity bill of approximately £1 million or more at current prices).

Organisations will need to establish the extent of their potential qualifying undertaking before they can work out whether their electricity consumption in 2008 met the threshold:

  • companies in the same group will be treated as one organisation;
  • the colleges of Oxford, Cambridge and Durham universities will be grouped together and will participate as universities rather than individual colleges. All other universities will be considered in their own right;
  • local authorities will be grouped together with the state funded schools in their area; and
  • each individual legal entity in the NHS will be treated separately and could be an individual participant, rather than the NHS being treated as one entity.

Landlords will have to include their tenants’ electricity consumption when working out if the threshold is met if it is the landlord who contracts with the energy supplier for the supply of electricity to a building. If, on the other hand, it is the tenant who contracts with the electricity supplier, then that consumption will count towards the tenant’s total consumption, not the landlord’s.

How will the CRC work?

Once the CRC scheme is fully operational, the Government will place a scheme-wide cap on the total amount of CO2 that can be emitted by participants in each scheme year. At the beginning of the year, the Government will sell off allowances equivalent to that cap; the idea being that participants will have to purchase sufficient allowances at the start of the year to cover their expected CO2 emissions for the coming year. One allowance will enable one tonne of CO2 to be emitted. At the end of the year, participants will have to calculate how many tonnes of CO2 they actually emitted. If they did not buy sufficient allowances at the start of the year to cover those emissions, they will have to buy more. Those who bought too many allowances will be able to keep their surplus for the following year or sell them to those needing to buy more. Once this reconciliation process has been completed, participants will then have to hand back to the Government a number of allowances equal to the amount of CO2 they emitted.

Importantly, the Government is not intending to cap emissions of individual participants or sectors.

Although organisations’ qualification is based solely on electricity consumption, once in the scheme, emissions from electricity, gas, fuel oil, petrol, diesel, coal and liquefied petroleum gas consumption will (unless one of the limited exemptions applies) all be taken into account. Landlords will have to buy allowances for gas and electricity used by their tenants if the landlords are contracting with the energy supplier.

Participants will be given time to get used to the new rules. For the first three years, there will be no total emissions cap and allowances will be sold to participants at a fixed price of £12 per tonne of CO2 (rather than by way of auction). There will be no limit on the number of allowances that organisations will be able to buy. The reason for this is that the Government recognises that most participants will not be familiar with forecasting, monitoring and reporting emissions and buying and trading allowances. The hope is that participants will become familiar with the scheme without having to deal with the complexity of a fixed volume auction or a Government imposed cap.

At the end of each scheme year the Government will, based on information submitted by participants, publish a league table showing the relative performance of all participants. Poor performers will effectively be “named and shamed”.

The CRC scheme will be revenue neutral to the Exchequer. Revenue raised from selling allowances, either at a fixed price or by auction, will be recycled back to participants. The Government is proposing that participants will receive a payment (called a “recycling payment”) and that those who reduce their CO2 emissions will be entitled to a larger slice of the cake than those whose emissions remain the same or increase.

The CRC scheme will contain a further incentive. There will be an additional bonus payment or penalty deduction based on each participant’s position in the league table. What this means is that those appearing at the bottom of the league table face the prospect of having a large proportion of their recycling payment taken away and given to those at the top of the table.

Comment

The CRC scheme will have a significant impact on those required to participate. For the first time there will be clear financial and public relations disincentives for failing to reduce energy consumption and CO2 emissions. There will be strong incentives for investing in energy-saving design and construction techniques and for adapting existing policies and procedures to save energy.

Participants face the prospect of not only having to pay more money in the event that their CO2 emissions do not decrease, but also of being named and shamed via the league table in the event of poor performance. There will be significant pressure to improve environmental performance.

Organisations may be responsible for the energy consumption/CO2 emissions of their tenants, subsidiaries and joint venture companies. Not only will this complicate the process of establishing whether or not an organisation needs to participate in the scheme, but it also means that one organisation (for example a landlord company) may have to buy allowances to cover the CO2 emissions of others (such as its tenants or licensees). The allocation of financial responsibility for compliance in these circumstances may not be covered by existing contractual arrangements. For example, it is not clear whether service charge provisions and covenants in existing leases will enable landlords to pass on the costs of complying with the CRC to their tenants. This point is highlighted in the British Property Federation’s CRC guide.

Organisations should be considering now the potential impact that the requirement to buy carbon allowances will have on budgeting and cash flow. Government has decided to hold a double sale in April 2011 covering the first and second years of the scheme. There will be a significant wait for participants before getting their recycling payments. Now is also a good time to be thinking about ways of reducing energy usage. Those who are able to reduce their emissions stand to gain most from the scheme.